Leases
Effective: Fiscal years beginning after June 15, 2021 (FY2022)
GASB 87 establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. It requires recognition of lease liabilities and intangible right-of-use assets for virtually all leases previously classified as operating leases.
Key Provisions
- Single model for all leases (no operating/capital distinction)
- Right-of-use asset recognized as intangible asset
- Lease liability measured at present value of payments
- Straight-line amortization of ROU asset
- Short-term exception for leases ≤12 months maximum possible term
- Regulated lease exception for externally-set lease rates
- Lessor recognizes lease receivable and deferred inflow
- Remeasurement required for lease modifications
Core Principle
Under GASB 87, a lease is defined as a contract that conveys control of the right to use another entity's nonfinancial asset for a period of time in an exchange or exchange-like transaction. The standard eliminates the previous distinction between capital and operating leases, replacing it with a single recognition model where lessees report a right-of-use (ROU) asset and a corresponding lease liability.
Lessee Accounting
At lease commencement, the lessee recognizes an intangible ROU asset and a lease liability. The lease liability equals the present value of expected lease payments over the lease term, discounted at the rate implicit in the lease or the lessee's incremental borrowing rate. The ROU asset equals the liability plus any payments made before commencement, plus initial direct costs, less any lease incentives received. The ROU asset is amortized straight-line over the shorter of the lease term or the useful life of the underlying asset.
Lessor Accounting
Lessors recognize a lease receivable and a deferred inflow of resources at lease commencement. The lease receivable is measured at the present value of expected lease payments, and the deferred inflow is measured at the value of the lease receivable plus any payments received at or before commencement that relate to future periods. The deferred inflow is recognized as revenue in a systematic and rational manner over the lease term.
Short-Term Lease Exception
Leases with a maximum possible term of 12 months or less (including any options to extend, regardless of probability) qualify for the short-term exception. These leases are recognized as expense in the period the payment is due, with no ROU asset or liability recognized. This exception is critical for fleet leases, equipment rentals, and month-to-month arrangements.
Discount Rate Selection
The discount rate is often the most challenging implementation decision. GASB 87 requires the rate the lessor charges the lessee (the rate implicit in the lease). When this rate is not readily determinable — which is common — governments use their incremental borrowing rate, estimated by reference to recent debt issuances, outstanding variable-rate obligations, or indicative rates from financial advisors.
Regulated Leases
Leases where payments are set by external regulators or legislation (such as airport terminal leases or port berth leases) may qualify for the regulated lease exception under paragraph 20. These leases are recognized as revenue or expense in the periods to which they relate, with no ROU asset or liability required.